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Tuesday, January 20, 2009

Only Business Activity and Expansion Creates Jobs

As the stimulus package that is bound to pass gets debated, one element of the debate will be just what is the best way to create jobs. Those in the camp of Barack Obama will tell you that government spending will create jobs. I would disagree. Government spending may employ people but it creates no jobs. Whatever folks are hired through government spending are taken away from other parts of the economy.

In my opinion, the only thing that creates jobs is business activity and more importantly growth. Walmart has created millions of jobs. That's because that has gone from an idea to a worldwide business. That's job creation.

Now, let's look at a hypothetical. Let's say I start a business and I hire six people. Yet, two years later, that business fails and I have to declare bankruptcy in order to avoid paying suppliers and others I owe. Have I created any jobs? Absolutely not, whatever job creation I made for those six people was more than lost by all of the people that worked with me and didn't get paid. The key to job creation is business expansion. If I were to create a business that was able to employ six people indefinitely while paying suppliers and others, then I would have created many more than six jobs.

So, what of the idea of stimulating the economy through government spending? The main problem is that government endeavors are inherently not for profit. When the government spends on a road, alternative energy, or a school, they aren't trying to make a profit. The problem with job creation through government spending is that business is much better at business expansion than the government. The government can spend billions to improve the roads. They can even hire thousands in order to fix the roads. Yet, that won't necessarily create any job. The government has no money of its own. It either taxes or it borrows. So, the money spent will come from someone's taxes, or it will come from someone that lends it to the government. Whatever job creation the government makes in building road will come at the expense of lost jobs from the taxes or lent money from the private sector.

Now if these new roads allow business to be conducted more quickly, more efficiently, and more profitably, then that will create jobs. Of course, there is no evidence that this will happen.

Ronald Reagan, himself, created no jobs. What did happen was that his tax cuts allowed entrepeneurs to take risks and those risks spawned business activity and expansion. That created jobs. Barack Obama would like to take money out of the private sector and create jobs through the public sector. Unless these projects spawn business activity, they will, however, create absolutely no jobs. So far, there is no evidence that anything Barack Obama will do will accomplish this.


Anonymous said...

For us capitalists, this is common knowledge, perhaps genetic in origin, and need not be stated. Back when schools actually educated students instead of indoctrinating them, this simple fact was widely taught.
Now, however, not even our colleg-educated lawyer-leaders understand how our economic system works.

Anonymous said...

Barack Obama Inaugural address

“The question we ask today is not whether our government is too big or too small but whether it works, whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end.”

mike volpe said...

Yes, he said something similar during the campaign. Everyone says what Obama says. We will see what he does.

Government is not supposed to help people find jobs, get health care they can afford, and give them a retirement that is dignified. All of these are nanny state functions. As such, I am not sure exactly what it is that Obama will do.